26. Which of the following actions would tend to reduce conflicts of interest between stockholders and bondholders?
Including restrictive covenants in the company’s bond indenture (which is the contract between the company and its bondholders).
Compensating managers with more stock options and less cash income.
The passage of laws that make it harder for hostile takeovers to succeed.
A government regulation that banned the use of convertible bonds.
Have the firm use only long-term debt, e.g., debt that matures in 30 years or more rather than in less than one year.
Temple Square Inc. reported that its retained earnings for 2005 were $490,000. In its 2006 financial statements, it reported $60,000 of net income, and it ended 2006 with $510,000 of retained earnings. How much were paid as dividends to shareholders during 2006?
Collins Inc’s latest net income was $1 million, and it had 200,000 shares outstanding. The company wants to pay out 40% of its income. What dividend per share should the company declare?
30. If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what would be the most likely effect on short-term securities prices and interest rates?
Prices and interest rates will both rise.
Prices will rise and interest rates will decline.
Prices and interest rates will both decline.
Prices will decline and interest rates will rise.
There is no reason to expect a change in either prices or interest rates.
Wagner Inc estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
Project A is of average risk and has a return of 9%.
Project B is of below-average risk and has a return of 8.5%.
Project C is of above-average risk and has a return of 11%.
None of the projects should be accepted.
All of the projects should be accepted.
You are considering buying a new, $15,000 car, and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10% and finance the car over 60 months, what are your monthly car payments?
The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm’s WACC is 14% and its tax rate is 40%, what is the project’s IRR?
Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales, and its fixed costs equal $1,000. If the company’s sales increase 10%, what will be the percentage increase in the company’s earnings before interest and taxes (EBIT)?
S. Claus & Co. is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years. The bonds will be sold today at a price of $826.45. If the firm’s marginal tax rate is 40%, what is the annual after-tax cost of debt to the company on this issue?